The Alleged Downstream Benefits of Government Investment in Industry | Print Version
by Harry Valentine*
Le Québécois Libre, November 15, 2013, No 316

Reports regularly appear in the media about some level of government investing in industry in the form of loans or grants. When opponents raise objections to such forms of government investment, supporters of the program usually sing the mantra, “It’s not the investment itself, it’s the downstream or spinoff benefits that result from government investment in industry!” Maybe there is a need to explore these alleged benefits, by starting with annual reports that date back over many years, from various government departments that distribute funds to companies, examining the long-term results beginning five years after the initial investment.

Transport Canada’s technology development branch provides transportation-related innovation funding, while Industry Canada provides funding to a range of manufacturing industries, and their provincial counterparts do the same. During the high-tech boom years, regular news reports announced some form of government investment in technology and information sector companies. The transaction usually involved a ceremony attended by both company officials and elected officials expounding on future job creation that was to result from government investing in industry. At the time, almost anyone who had an idea related to information technology could apply for, and would usually receive, a government grant.

Earlier Parallels

The government high-tech investment program had an earlier parallel involving government distributing funds for future development. US President Lyndon Johnson’s Great War on Poverty initially required government officials to distribute funding to deserving students from economically challenged family backgrounds. These were students who had achieved high scores on high school scholastic aptitude tests (SAT). Government funding made it possible for them to attend college or university. The program then expanded to provide welfare to almost anyone from a disadvantaged background.

While easy access to government welfare was guaranteed to win votes in several electoral districts, its alleged short-term benefits had unforeseen long-term drawbacks. It replaced private charity programs that could carry a family that had suffered a setback through a short-term emergency. Government welfare evolved into a lifestyle where a percentage of the population quite literally planned their lives around an easy-money welfare program. Drug-related crime rates escalated in neighbourhoods with high concentrations of welfare recipients as some residents sought to supplement their incomes by engaging in the lucrative drug trade, which government restrictions had made more profitable.

Corporate High-Tech Social Assistance

While a high SAT score assured easy access to government funding to pursue a higher education, a high-tech start-up company whose members had earned the equivalent of a high SAT score at college or university became eligible for government funding. During the early years of the high-tech boom, government officials who doled out the funding had to show that the funding was being given to groups of highly educated people who had great potential for future success. The odds for success were regarded as being extremely high, like a sure bet.

But government officials generally have little understanding of successful entrepreneurship and successful invention. There are many examples in the history of invention that show that the most highly educated people are not always the most inventive. The inventor of the high-pressure steam engine, James Watt, was a janitor. Thomas Edison, who was a prolific inventor, and Henry Ford, who developed a mass-production line for automobiles, both had achieved only a grade school level of education. Neither Nikola Tesla (who inverted AC electricity) nor Bill Gates (who initially wrote programs for small computers) would have qualified for government technical investment.

An examination of departmental annual reports provides details as to the amount of funding that various government departments provided to industry, consultants and universities. There are annual reports dating back over 30 years that provide details of government-funded transportation-related innovation. The long-term results five to ten years after initial investments suggest the failure of several high profile projects such as high-speed passenger trains, an articulated long-distance bus and an executive business jet. In some cases, up to 80% of the government-funded projects failed in the market within five years after completion of the first production model.

Supporters of government-funded programs emphasize the downstream benefits of such funding. However, evidence of the long-term downstream benefits of failed government projects appears to be very limited. VIA Rail’s last purchase of railway carriages were from the UK. Worldwide, operators withdrew articulated long-distance buses at about the time that Transport Canada invested in the development of a Canadian version. There are potential customers being paid by government to take test flights in a government-funded business jet. The story repeats itself with government investment in energy technology, with plenty of technology and a lack of customers.

Customers and Competitors

Clearly, a product needs customers in order for it to be viable. Customers need to perceive that the product provides them with added value, such as enhancing productivity, reducing operating costs or perhaps increasing earnings. The foot-treadle driven sewing machine allowed one person to sew as much material per day as one hundred people sewing by needle and thread. A hand-cranked cotton gin allowed two workers to remove as much cotton from cotton plants as one hundred people who worked by hand. Private funding developed both pieces of technology.

The high-tech bust and dot-com meltdown occurred as a result of a lack of customers for the over-abundance of new electronic products and information sector services that began to flood the market. A large percentage of these products and services came into existence courtesy of government funding of new business ventures. But the same government seemed powerless to coerce the market at large to purchase the new products and services. It is possible that the downstream benefits of government investment in high-tech may have gone overseas, to companies located in central India and China’s Pearl River Delta.

Government funding can stall the plans of privately funded manufacturers of competing products. When a competitor or a university has access to government funding to improve a technology, customers may delay making a purchase on the expectation that government funding may produce a positive result. For over 20 years, the US government provided research funding to improve the efficiency of the externally heated Sterling cycle engine. During that period, customers refused to buy such an engine. Government research funding achieved little if anything to improve the engine’s efficiency, while the few manufacturers that had previously built the engine discontinued the product.

The precedent of government funding to improve technology has occurred in many industries. In some cases, privately funded competitors closed down. In other cases, such as the renewable energy sector, government funded competing companies to develop or improve competing products. The companies then discovered a shortage of customers and an abundance of regulations and bureaucratic red tape when it came time to market and sell their products. Perhaps the downstream benefits may take the form of a private company gaining access to an abundance of competing redundant technology at low cost, from companies that may close down.

Small town newspapers regularly carry reports of local industries having received funding from some level of government to help develop a product. In many cases, the funding may amount to a less than the company’s annual tax bill or the salary of two to four employees. Government could achieve the same result at lower cost by giving the company a tax break. While giving funds to local companies located in small communities may raise the profile of the local elected official, citizens are losing interest and are beginning to see the practice as what it is: an attempt to gain future votes.

* Harry Valentine is a free-marketeer living in Eastern Ontario.